Paul Krugman argues that “you can have full employment based on purchases of yachts, luxury cars, and the services of personal trainers and celebrity chefs”. What about that? In theory it could happen, but there’s no evidence that it does happen in the world we actually live in. As we’ve seen, high income earners do save more than low income earners, and that is not merely an artifact of consumption smoothing.

If the rich did consume in quantities proportionate with their share of income, we would expect the yacht and celebrity chef sectors to become increasingly important components of the national economy. They have not. I’ve squinted pretty hard at the shares of value-added in BEA’s GDP-by-industry accounts, and can’t find any hint of it. I suppose personal trainers and celebrity chefs would fall under “Arts, entertainment, recreation, accommodation, and food services”, a top-level category whose share of GDP did increased by 0.5% between 1990 and 2007. Attributing all of that expansion to the indulgences of the rich, more than 90% of the proportional-consumption expected increase in the top one percent’s consumption remains unaccounted. The share of the “water transportation” sector has not increased. If the rich do consume in proportion to their income, they pretty much consume the same stuff as the rest of us. Which would bring a whole new meaning to the phrase “fat cats”. Categories of output that have notably increased in share of value-added include “professional and business services” and “finance, insurance, real estate, rental, and leasing”. Hmm.

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It's a somewhat curious phenomenon when you think about it. The conventions of the National Income and Product Accounts have it that yacht-buying is consumption (durable goods) while buying into a hedge fund is savings/investment. But the metaphysics behind that distinction isn't all that central to anything. If you owned a huge stockpile of yachts somewhere, that would serve as a savings vehicle. In case of hard times ahead you could sell a yacht or two to raise cash. It wouldn't necessarily be any more imprudent to stockpile durable goods, vacation houses, jewelry (you can always take it to the pawn shop!), art, etc. than to invest in high-fee low-return hedge funds.